Chapter 14
DEFINED BENEFIT PENSION PLAN
LEARNING OBJECTIVES:
A. Have a general understanding of defined benefit pension plans
REVIEW:
After beginning with brief sections describing the plans, their advantages and
disadvantages, this chapter focuses on defined benefit plan design features. Tax
implications are discussed, along with a statement that the plan is subject to all
ERISA qualified-plan requirements. Following this, alternatives are mentioned,
along with a note guiding the reader back to Chapter 10 for plan installation
procedures. A short reference section “Where Can I Find Out More About It?” is
included. The chapter closes with a question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features
Tax Implications
ERISA Requirements
Alternatives
How To Install A Plan
Where Can I Find Out More About It?
Questions And Answers
Chapter Endnotes
1
Chapter 14
FEATURED TOPIC:
Defined Benefit Pension Plans
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
2) Defined benefit
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a general understanding of defined benefit pension plans
KEY WORDS:
flat amount formula, flat percentage formula, unit credit formula, career average,
final average
DISCUSSION:
1. Discuss differences between flat amount, flat percentage, and unit
credit benefit formulas.
2. Discuss advantages and disadvantages to installing a defined benefit
pension plan.
QUESTIONS:
1. Which of the following match the funding formula term with its correct
description?
(1) flat amount formula: provides a benefit based on a percentage of the
employee’s average earnings
(2) flat percentage formula: provides a benefit based on a stated dollar
amount
(3) unit credit formula: provides a benefit based on the employee’s service
with the employer
Chapter 14
(4) career average method: uses earnings averaged over the employee’s
career with the employer
a.
b.
c.
d.
(1) and (2) only
(3) and (4) only
(1) (2) and (3) only
(2) (3) and (4) only
Chapter 14, pp. 133-34
2. If a defined benefit plan becomes over funded, what is the usual result?
a. excess amounts must be withdrawn prior to the current plan year
b. excess amounts must be refunded to employees prior to the end of the
plan year
c. employer contributions for the plan year are assessed a 10% excise tax
penalty
d. employer contributions must be suspended for a period of time
Chapter 14, p. 134
3. Which of the following options are considered possible defined benefit pension
plan alternatives?
(1) money purchase pension plan
(2) target benefit pension plan
(3) cash balance pension plan
(4) stock bonus plan
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 14, p. 136
4. Which of the following may allow a defined benefit plan to meet safe harbor
nondiscrimination requirements?
(1) a unit credit plan with an annual accrual rate less than 133 1/3% of the
rate for any prior year of service
(2) a fractional accrual plan
(3) a fully insured plan
(4) a section 401(k) plan with seven-year cliff vesting
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a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 14, pp. 138-39
ANSWERS:
1. b
2. d
3. d
4. b